Q&A Hero

Q: ______________________ refers to the borrowers' use of debt in their firm.

Q: _____________________________ are the ultimate standards of performance in a market-oriented economy. These measure the net income that remains for owners after all expenses (except stockholder dividends) have been charged against revenues.

Q: The borrower's ______________________ position reflects his or her ability to raise cash in a timely fashion at a reasonable cost.

Q: ______________________ refers to the protection afforded to creditors of a firm based on the amount of the firm's earnings.

Q: A(n) ______________________ is a loan extended to a business firm by a group of lenders in order to reduce the risk exposure to any one lending institution and to a earn fee income.

Q: ______________________ examines how effectively assets are being utilized to generate sales and how efficiently sales are converted into cash.

Q: A(n) _________________________________________ is a contractual promise by a bank to lend to a customer up to a maximum amount of money at a set interest rate (or rate markup over the rate prime or LIBOR). The only way the bank can renege on its promise is if there has been a "material adverse change" in the borrower's financial condition.

Q: ______________________ are designed to fund long-term investments such as the purchase of equipment. Money is borrowed in one lump sum and repayments are generally made in installments.

Q: ____________________________________________ are the other potential claims against the borrower which do not show up on the borrower's balance sheet. One new form of this is due to environmental damage by the borrower.

Q: A(n) ______________________ is the purchase of a publicly traded company by a small group of investors. These investors often borrow very heavily to finance the purchase of the stock of the company.

Q: When the title to accounts receivables pledged in an asset-based loan is passed to the lender and the lender takes the responsibility of collecting the accounts receivables of one of its business customers, this is called ____________________.

Q: Working capital loans often require _____________________. These are required deposits in the bank by the borrower whose size is dependent on the size of the credit line.

Q: A(n) ______________________ is generally used to support the construction of homes, apartments, office buildings, and other permanent structures.

Q: A(n) __________________________________ is generally used to finance the purchase of inventory to sell and take advantage of the firm's normal cash cycle to repay the loan.

Q: The principal economic function of banks is to: A. take deposits. B. make loans. C. sell financial services. D. encourage spending. E. None of the options is correct.

Q: Following the recent global credit crisis, regulators have begun to emphasize the need for loan originators to know their borrowers better and retain some of the risk on loans that they sell.

Q: Commercial banks are the largest originator of household loans.

Q: The "direct cash flow" method and "cash flow by origin" are two very different ways of assessing the cash flows of a potential borrower.

Q: Net cash flow from operations is a borrower's net income expressed in cash rather than on an accrual basis.

Q: The "A" in the CAMELS rating system stands for asset quality.

Q: Agriculture loans are ones that are made to individuals to finance vacations, purchase durable goods, and other retail goods.

Q: Commercial and industrial loans are loans to businesses to cover such things as purchasing inventory, paying taxes, and meeting payroll expenses.

Q: A written loan policy gives loan officers and the bank's management specific guidelines in making individual loan decisions and in forming the bank's loan portfolio.

Q: A loan workout is when a bank and its customer initially negotiate the terms of a loan.

Q: For ease and convenience, most banks have the loan review conducted by the same person who makes the loan. This is particularly true of large banks. FALSE

Q: Affirmative covenants restrict a borrower from doing certain things, like taking on new debt without the lender's approval.

Q: Negative covenants require the borrower to take certain actions, such as periodically filing of financial statements and maintaining insurance coverage.

Q: There are three principal sources of cash to repay a loan. These are cash flows generated from sales or income, funds generated from the liquidation of assets, and, funds raised by selling debt or equity securities.

Q: Cash is one of the six Cs of lending and refers to the fact that the lender wants to make sure that the borrower has the ability to generate enough cash to repay the loan.

Q: Loan review is considered to be a luxury, not a necessity for most banks, especially those with sound lending policies.

Q: A restriction against a borrower taking on new debt during a loan period is an affirmative covenant in a loan contract.

Q: Accounts receivable financing entails a bank actually taking over the ownership of receivables, whereas factoring entails a bank merely lending money against a borrowing customer's receivables and the customer still retains the ownership of the receivables.

Q: A rating of "5" is the highest and the best rating that a U.S. bank can receive under the CAMELS rating system.

Q: Financial institutions that disagree with an examiner's classifications of their loans can appeal against these ratings.

Q: Loans to a bank's officers, extended for purposes other than purchase of a home or funding education and those that are not fully backed by government securities, cannot exceed 2.5 percent of the bank's capital and unimpaired surplus or $25,000 whichever is larger but cannot exceed $100,000.

Q: Loans granted to businesses appear to convey positive information to the market place about a borrower's credit quality, enabling a borrower to obtain more and cheaper funds from other sources.

Q: If the economy slows down, a bank should review its outstanding loans more frequently.

Q: Construction loans by a bank fall under the loan category known as commercial and industrial loans.

Q: Banks should concentrate their lending on those types of loans in which they have the greatest cost advantage.

Q: Credit card loans are generally more profitable for small and medium-size banks than for the large banks.

Q: Troubled loans normally are subject to more frequent reviews than sound loans.

Q: The process of loan review means that a loan committee must generally approve a loan before the borrower is told the loan is approved.

Q: The letter "M" in the CAMELS rating system for banks in the U.S. refers to the "management quality" of a bank.

Q: The letter "C" in the CAMELS rating system for banks in the U.S. refers to the "condition" of a bank.

Q: Loans to minors are not legally enforceable contracts in most states.

Q: According to the Community Reinvestment Act, selected lenders must make an "affirmative effort" to provide loans and other services to all credit-worthy borrowers in their chosen service area.

Q: Loans made by a particular bank secured by its own stock are not usually permitted except under special circumstances.

Q: Retail credit in banking refers to such loans as residential mortgages and installment loans to individuals.

Q: Smaller banks tend to emphasize wholesale banking services.

Q: At least once in a year, banks in the United States are required to report the composition of their loan portfolio by purpose of loan on a report form known as Schedule A.

Q: Real estate lending is popular with banks, in part, due to the growth of the secondary mortgage market.

Q: Risk in banking tends to be concentrated in a bank's loan portfolio.

Q: The principal reason why banks are chartered by federal and state governments is to make loans to their customers.

Q: In a loan workout process, the preferred option is nearly always to seek a ___________, which gives both the lending institution and its customer a chance to restore normal operations.

Q: The risk of change in the quality of assets due to factors such as changes in the economy, natural disasters, and regulations are referred to as __________ factors, while management errors, illegal manipulation, and ineffective lending policies are considered as ___________ factors.

Q: In the mortgage environment of the early 2000s, lenders were encouraged to sell individual loans and packages of loans to buy more liquid securities, thus shifting much of the risk of lending to capital markets. This process is referred to as _________________.

Q: One of the problems with the newer lending model called _________________ was found to at least partially contribute to the recent crisis in the mortgage market.

Q: One of the most widely consulted sources of data on business firms is ______________ which was founded in Philadelphia in 1914 to exchange credit information among business lending institutions and to organize conferences and publish educational materials to train loan officers and credit analysts.

Q: One of the six Cs of lending is ______________________ which looks at whether the borrower has a well-defined purpose for the loan and a serious intent to repay the loan.

Q: One of the elements of CAMELS rating system is _____________________ which looks at the quality of a bank's loans. Examiners look at all loans over a certain size and a random selection of all other loans when looking at this aspect of a bank.

Q: Under the ___________________________ Act, no individual can be denied credit because of race, sex, religious affiliation, age or receipt of public assistance.

Q: The loan mix of any lending institution depends heavily on the _____________________ that each loan offers compared to all other assets a lending institution can acquire.

Q: Smaller banks tend to emphasize on _________________ in the form of smaller denomination personal cash loans and home mortgage loans extended to individuals and families as well as smaller business loans.

Q: ________________________ are types of loans where a lender buys equipment or vehicles and rents them to its customers.

Q: ________________________ include credit to finance the purchase of automobiles, mobile homes, appliances, and other retail goods and services purchased by consumers.

Q: ______________________ loans are those that are granted to businesses to cover purchases of inventory, paying taxes, and meeting payrolls.

Q: An approach that divides the cash flows of a firm into three principal sources, namely cash flow from operations, cash flow from financing activities, and cash flow from investing activities, is known as the _____________ cash flow method.

Q: A bank's _____________________________________ gives its loan officers specific guidelines in making individual loan decisions and in shaping the overall loan portfolio.

Q: ______________ is one of the key features of any loan. This is one of the Cs of lending that examines whether a borrower will be able to generate enough liquid assets to repay the loan.

Q: A(n) ______________ is the process of resolving a troubled loan so that a bank can recover its loaned funds.

Q: ______________ loans are ones that carry a strong probability of loss to the bank.

Q: Credit extended to banks, insurance companies, finance companies, and other similar institutions is known as _______________.

Q: ____________________________ are certain actions that a borrower must take during a loan period. Examples include filing periodic financial statements with the bank and purchasing insurance on any collateral pledged.

Q: A(n) ______________ is a written contract signed by a borrower and states the principal amount of the loan, the interest rate on the loan, and the terms under which repayment must take place.

Q: ____________________________ loans are ones that are secured by land, buildings, and other structures. These loans can be short term construction loans or longer term loans to finance the purchase of homes and apartments among others.

Q: ___________________________, usually large banks, devote a bulk of their credit portfolio to large-denomination loans directed towards corporations and other businesses.

Q: ____________________________ loans are ones that are extended to farmers and ranchers to assist in planting crops, harvesting crops, and to support the feeding and care of livestock.

Q: Loans that have minor weaknesses because a bank has not followed its written loan policy or which have missing documentation are called ______________ loans.

Q: When a bank purchases a whole loan or a piece of a loan from another bank, they are purchasing what is known as a ___________________________.

Q: One of the 6 Cs of lending is ______________ which suggests that a lender must ensure that the borrower is legally entitled to sign a binding loan agreement. For an individual this entails making sure the borrower is of a legal age to sign a contract.